European equity market performance has been improving steadily in the recent past. Dollar volume of equity capital markets in western Europe in the hospitality industry has risen significantly from 1992 to 1997. The growth in equity assets under management in Europe has risen from approximately $2 trillion in 1994 to more than $3 trillion in 1996. Expectations are there will be sustained long-term growth in the hotel industry driven by significant liquidity in the equity markets.
Key factors in future development of the hotel industry are general liquidity, supply and demand and the establishment of the European Monetary Union. The western European hotel sector has been extremely attractive from an investment standpoint because of a relative lack of supply in relation to increasing desire for travel and vacation lodging. The growth in the hotel industry is generally also seen as bright because of the establishment of the European Monetary Union and the issuance of Euro currency. Last month the European Union Summit selected Austria, Belgium, Finland, France, Germany, Holland, Ireland, Italy, Luxemburg, Spain and Portugal for the first wave of the European Monetary Union. Also, exchange rates between Euro and national currencies will be fixed, the European Central Bank will begin its operations and all prices must be displayed in Euro and national currencies. During the year 2002, Euro coins and notes will be put into circulation and traditional currencies will disappear.
Because of the single monetary union, and due to increased demand for lodging, expectations are occupancy rates will continue to rise steadily as they have since 1993. Room occupancy will follow the trend established since 1993, for increases in most, if not all, countries of Europe, and average room rates should improve as well.
Many European hospitality companies are publicly traded and quoted. The U.K. and its equity markets lead Europe in the hospitality industry because a history of high and volatile inflation rates make bonds less attractive and the U.K. has a strong culture of equity ownership, especially through U.K. company pension schemes. Europe has lagged the U.K. somewhat in its emphasis on equity financing, relying more heavily on bond financing because of lower inflation rates and less of a culture of equity investment generally. On the other hand, it is anticipated that the emphasis by significant hotel chains in worldwide development and general interest in equity financing may improve capital markets for Europe. In addition, indications are that REITs may be looking at Europe for attractive investment opportunities, as they are currently in the United States.
Franchising as a vehicle for development of hospitality investment may develop more slowly in Europe. The lack of space and zoning restrictions may limit the development of branded new build operations. In addition, hotels willing to convert to branded operations may not be entirely suitable for franchised operations. Many existing European hotels have a unique character, and it may be difficult or impossible for such hotels to meet the standards of branded operations entirely, if at all. In addition, smaller European hotels may be unwilling to change their character to comply with such standards. To the extent that larger branded operations will move into European operations on a conversion basis, expectations are that a form of dual branding, using the franchisor's brand in connection with the original hotel brand, may be the most attractive avenue and would allow the original operation to retain its name and character.